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“Investor Confusion” Over How Advisers Differ from Brokers Stymies Regulatory Disclosure, Experts Say

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Since the SEC RAND Report of 2008, “investor confusion” has been a central story on retail investor regulation and disclosure. The SEC has struggled to clear up this “confusion”. Some experts and pundits fault investors. We disagree and fault bad language – words and terms that are unclear. Blaming investors for vague or convoluted language is wrong. It is shameful. Plain language describing concrete ideas can improve investor understanding and protections.      

Knut A. Rostad, Deborah Bosley, Darren Fogarty *

Download the full paper here.
Download the news release here.
Download the proposed Form CRS here and the Reg Rep product cost disclosure here.

Introduction and Summary

The 2019 SEC broker and adviser rulemaking package  was fully enforceable June 30, 2020. Regulation Best Interest (Reg BI) seeks to set out a new standard for brokers. Form CRS seeks to express what this standard and the investment adviser standard mean. SEC commissioners, industry participants and investor advocates expressed starkly different views of Reg BI. These differences are basic and include how broker-dealer product distribution and sales differs from investment adviser fiduciary advice. When the rule was proposed, Commissioner Stein said Reg BI just “maintains the status quo” and Commissioner Peirce described it as “suitability plus.”

The SEC commissioned the RAND Corporation to research investor perceptions of brokers and advisers; RAND produced major reports in 2008 and 2018. The main conclusion in both reports is that “investor confusion” on the differences and obligations of brokers and advisers is rampant. RAND 2008 noted, the “growing complexity” of the market explained investor confusion. The implicit message for many: investors are mainly at fault. This view is now “conventional wisdom.”

This paper takes a fresh look at research on investor confusion. We conclude that the conventional wisdom is flawed and offer a different view. While we agree there is much investor confusion over brokers and advisers, we disagree that the “complexity” of the market or investors themselves are mainly at fault. Instead, confusing industry messaging and the lack of clarity and omissions in SEC disclosure itself stand out.  

The implications of this view are significant for the SEC’s 2019 rulemaking. It reflects concerns raised by Commissioners Stein and Peirce, asking what Form CRS should seek to accomplish. We review research on Form CRS and offer a revised Form. We also offer a ‘Product Cost Disclosure’ to provide investors the specific cost data they want which should be provided at the point of sale.

* Knut A. Rostad is president and founder of the Institute for the Fiduciary Standard. Deborah Bosley is the Owner and Principal of The Plain Language Group and a member of the Board of Advisors to the Institute. Darren M Fogarty is Research Analyst at the Institute. The Institute is a non-profit that exists to advance the fiduciary standard through research, education and advocacy. For more information see www.thefiduciaryinstitute.org.

Media Mentions

Download the full paper here.

Dan Moisand

 

Dan Moisand is a nationally recognized fiduciary fee-only financial planner, an Institute Real Fiduciary™ Advisor and Chair-elect of the CFP Board.

The Institute has enshrined the ‘Moisand Rule’ on fiduciary practices. It is basic and is more important today than ever: “You have to avoid conflicts. If I avoid a conflict, I don’t worry about it.”

Watch the video of Moisand speaking here.

Bob Veres

 

Bob Veres is a long term observer of financial planning. His Newsletter, “Inside information” Is a staple of leading planners. In the May edition he writes about fiduciary and the Institute.

"But a much bigger point is that the fiduciary standard—as Knut Rostad of the Institute for the Fiduciary Standard has pointed out—has been determined by the Supreme Court (1963 ruling) to be at the very heart of the Investment Advisers Act of 1940. It is the foundation of what it means to be an RIA registered with the SEC instead of a tipster or a tout."

- Bob Veres, Parting Thoughts ... The SEC's Own Compliance Culture